Miller v. Commissioner , 49 T.C. 484 ( 1968 )

Nicholas C. Miller, Petitioner v. Commissioner of Internal Revenue, Respondent

Miller v. Commissioner

Docket No. 5977-65

United States Tax Court

49 T.C. 484; 1968 U.S. Tax Ct. LEXIS 177;

February 19, 1968, Filed

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Decision will be entered under Rule 50.

Sec. 71(a)(2) and (d). -- This case comes precisely within sec. 71(a)(2) and (d) and is decided in accordance with those provisions.

Richard L. Shook, for the petitioner.

Herbert A. Seidman, for the respondent.

Murdock, Judge.

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MURDOCK

The Commissioner determined a deficiency in the petitioner's income tax for 1962 of $ 370,833.61 and an addition of $ 18,541.68 under section 6653(a). The only issue for decision is whether the Commissioner erred by including $ 401,878.25 in ordinary income as "Gain on transfer of property in settlement of support and maintenance obligation." The Commissioner has conceded other assignments of error.

FINDINGS OF FACT

The petitioner, Nicholas C. Miller, resided in Bethesda, Md., on October 8, 1965, at the time he filed his petition in this case. His individual return for 1962 was filed with the director of internal revenue for the district of Richmond, Va., and that director sent the deficiency notice to the petitioner, who lived in Virginia at the time he filed his 1962 return.

The petitioner and Joy Wadleigh were married in 1941 and three children were born of that marriage.

The petitioner acquired a tract of land in Fairfax and Arlington Counties, Va., on July 22, 1953. He and his wife, Joy, on August 24, 1960, leased that property to Lawrence L. Levin, Myron S. Levin, and Simon Wagman as partners trading as the Colonial Investment Co., for a period of 75 years at an annual rental of $ 31,740. The petitioner paid $ 50,000 to realtors as commissions in connection with the negotiation of that lease.

The lessees could terminate the lease under conditions described therein as could the lessors. The lessors were subject to certain obligations in the lease. The annual rent could not be reduced but could be increased should a Bureau of Labor Statistics Consumers Price Index increase at certain times.

Differences arose rather frequently between the petitioner and his wife and on May 26, 1961, Joy filed a bill for separate maintenance in the Circuit Court of Fairfax County, Va., seeking custody of and support for their three minor children and support and maintenance for herself.

The petitioner and Joy entered into a written separation agreement on December 30, 1961, which covered many matters between them. They have been separated and have lived apart since that date. The agreement provided that the parties could live apart from each other; the 75-year lease should be assigned to John Thorpe Richards, Trustee, until Joy died or remarried; the trustee should pay Joy, while she lived and did not remarry, $ 2,350 per month starting September 1, 1962, reduced to $ 2,000 per month beginning January 1, 1968; and the trustee should pay the petitioner each year the balance of the annual rental after the payments to Joy and the cost and expenses of the trust. The petitioner also agreed therein to pay Joy $ 2,350 per month for the first 8 months of 1962.

The petitioner and Joy, as his wife, on February 28, 1962, transferred the 75-year lease to Richards as trustee pursuant to a provision of the December 30, 1961, separation agreement. Richards was attorney for the petitioner. The trust agreement provided that $ 2,350 of the rent on the 75-year lease was to be paid by the trustee to Joy monthly through 1967 and thereafter $ 2,000 was to be paid to her monthly until her death or remarriage. All remaining funds from the rent, after trusts costs and expenses, were to be paid to the petitioner.

The Circuit Court of Fairfax County, Va., on April 2, 1962, ratified the agreement dated December 30, 1961, between the petitioner and Joy.

The trustee had no funds with which to make the September, October, and November 1964 payments to Joy and the petitioner did not make such payments or otherwise cause them to be made. Joy filed a Petition to Reform in the Circuit Court of Fairfax County, Va., on November 18, 1964. The petitioner's answer thereto was filed on November 19, 1964. Both parties filed a memorandum in the reformation proceeding. The defaulted payments were made to Joy by the trustee shortly after November 19, 1964, out of rental proceeds. The Circuit Court judge, before whom the reformation proceeding was pending, wrote a letter on June 9, 1965, to counsel for the respective parties indicating that no action would be taken on the petition. No order has since been entered with respect to the matters raised by the petition filed on November 18, 1964.

The $ 401,878.25, representing the gain attributed by the Commissioner to the transfer of the lease to the trust and included by him in the petitioners' gross income in determining the deficiency herein, is the commuted value of Joy's right to receive during her lifetime the monthly payments provided for in the separation agreement dated December 30, 1961.

Joy included the entire amount of the various monthly payments which she received from the trustee in her gross income on her separate Federal income tax returns for 1962 and subsequent years.

All stipulated facts and exhibits are incorporated herein by this reference.

OPINION

The Commissioner held that the $ 401,878.25 was ordinary taxable income of the petitioner as gain on the transfer of property in settlement of his support and maintenance obligation to Joy. He explained in the deficiency notice that "you realized additional ordinary income in the amount of $ 401,878.25 by reason of your transfer to a trust of certain income rights, which transfer was made in settlement of your obligation to support your wife, Joy W. Miller." He concedes in his brief that $ 8,500 of the expenses of the lease should reduce the income to $ 393,378.25.

The property of value, that is the lease, which produced the income in this case was never transferred to Joy. Also she and the petitioner were never divorced and remained husband and wife at all times material hereto. No divorce action was ever instituted or contemplated. Joy joined with her husband, the petitioner, in leasing the land in August 1960 and she also joined him in transferring the lease to the trustee on February 28, 1962.

Cases cited by the Commissioner, in support of his determination, which cases involved a complete transfer of a piece of income-producing property by the male party to the female party in a proceeding involving divorce, are not in point here since the decision in this case must be made in accordance with provisions of section 71, I.R.C. 1954:

Section 71(a)(2) is as follows:

If a wife is separated from her husband and there is a written separation agreement executed after the date of the enactment of this title, the wife's gross income includes periodic payments (whether or not made at regular intervals) received after such agreement is executed which are made under such agreement and because of the marital or family relationship (or which are attributable to property transferred, in trust or otherwise, under such agreement and because of such relationship). This paragraph shall not apply if the husband and wife make a single return jointly.

Joy was separated from her husband, the petitioner, during 1962. They had a written separation agreement executed on December 30, 1961. Joy's gross income for 1962 included periodic (monthly) payments received after the above agreement was executed and made under that agreement because of the marital relationship. Those payments beginning September 1, 1962, were attributable to property transferred in trust under the December 30, 1961, agreement because of the marital relationship of Joy and the petitioner. Joy and the petitioner did not make a single return jointly for 1962. Joy reported the entire amount of the 1962 and later payments from the trustee in her income. That was in accordance with section 71(a)(2), I.R.C. 1954.

Section 71(d) provides, "The husband's gross income does not include amounts received which, under subsection (a), are (1) includible in the gross income of the wife, and (2) attributable to transferred property." Thus none of the payments from the trustee to Joy are to be included in the petitioner's income. Those payments for 1962 and all subsequent years during the life of the trust would be taxed to the petitioner as 1962 income under the Commissioner's determination. The determination of the deficiency is erroneous under section 71 (a) (2) and (d) and none of the payments made by the trustee to Joy may be included in the petitioner's 1962 gross income.

The Commissioner, claiming that the provisions of section 71 (a) (2) and (d) are inapplicable, cites cases involving facts unlike those here present and which were decided under provisions of the 1939 Code. Section 71 of the 1954 Code was intended to change the former law in several respects in order to make it uniform in application. This case comes precisely within the present law and must be decided in accordance with that law.

Decision will be entered under Rule 50.